Opinion

Budget 2023: Will It Lift Nepal’s Descending Economy?

Published On: June 5, 2023 09:00 AM NPT By: Hari Prasad Shrestha


Finance Minister Dr Prakash Saran Mahat presented the budget for the upcoming fiscal year in the parliament on 29th May 2023, with promises to lift the descending economy and to accelerate development activities. The budget with an economic growth rate of six percent to be achieved in the next fiscal year expects to tame the inflation rate at 6.5 percent.

The size of the budget at Rs 1.75 trillion is supposed to be outside the limit of the government based on trends of revenue collection and probability to receive loans and grants and other receipts. However, this budget is smaller than last year's budget in size. Of the amount, Rs 1.141 trillion will be for recurrent expenditure and Rs 302 billion for capital expenditure while Rs 307 billion has been allocated for financial management. The source of financing will be Rs 1.24 trillion from revenue, Rs 49.94 billion from foreign grants, Rs 212 billion from external loans, and Rs 240 billion from internal loans.

Some economists opined that the above 1.6 trillion budget could be unbearable to the economy. If the internal debt increases, inflation will increase, and the scope of credit available to the private sector will shrink and external debt cannot be taken beyond the capacity to pay. In the current situation, it would not be easy to fulfill the required amount of revenue from both domestic and external resources. The government needs enormous efforts to collect and receive the required revenue.

Currently, the economic health of the nation is not very healthy and there is a buzzword that the economy has been seriously injured and suffering from numerous ailments. Inflation is on the rise with limited employment opportunities. Industries and  other productive sectors  are not performing well due to declining demands in the market. The financial institutions are suffering from a liquidity crisis and the commodity and stock markets are not functioning satisfactorily. Moreover,  the revenue collection is far below the target, there is a widening gap between imports and exports, interest rates are high, and the recurrent budget is uncontrollably high while the capital expenditure is low, making the economy quite vulnerable. Moreover, the highest contributor to the GDP, agriculture, followed by the real estate, industries, construction, forest, communication, and services are still suffering from stagnation or downward negative trends.

Despite slackness in the economy, the tourism sector, which contributes 6.7% to the GDP, is moving towards the pre-Covid situation with some improvements. And based on Nepal Rastra Bank’s statistics, Nepal’s remittance earnings increased 27 percent to Rs 689.88 billion in the first seven months of the current fiscal year. As a result of increased remittance earnings, the gross foreign exchange reserves increased 13.8 percent to Rs1,383.33 billion in mid-February 2023 from Rs1,215.80 billion in mid-July 2022.

The budget has more traditional characteristics with new promises and some transformative plans and programs. The budget has announced  the second phase of economic reforms programs, which would start from next fiscal year. There are some positive starts in the budget such as without fulfilling all pre-works , procedures and clearance of hurdles, no project would be allowed to start and without guarantee of resources, no contract of multi-year financing of the projects would get approved from the Ministry of Finance. The problem of land acquisition will be solved through formulation of new laws. As a result of the problem of tax unpredictability and lack of sovereign credit rating, the investors hesitate to invest in Nepal. The budget has however assured to make taxes more predictable and promised to perform sovereign credit rating of Nepal.

Top priorities have been given to health, education, agriculture, tourism, infrastructure and employment. The announcement to initiate construction of Nijgadh International Airport after finalizing proper investment modalities is considered a bold step as it could uplift the economic face of the nation to a great extent. The budget has a target to produce an additional 900 MW of electricity next year, with total production of 3600 MW. Moreover, the maximum number of road construction and upgradation seems to be one of the top programs  of the budget. As a new initiative, the use of cement iron rod concrete structure for road construction would  decrease the import of bitumen and it would support domestic cement and iron rod industries.

At least one slab below rate in import of  raw material compared to finished goods rates and policy to conduct feasibility study of marijuana cultivation and its impact on Nepali economy are also positive aspects. Construction of one hill station each in Koshi, Lumbini and Sudurpaschim provinces would promote the tourism industry.  Labeling of both importers and distributors made mandatory while selling imported goods in the domestic market will control illegal import and evasion of taxes. The budget has drastically curtailed the expenditure on office operation, fuel, maintenance, foreign visit, seminar, training, consultancy, grants, furniture, vehicles, and all types of allowances. Based on the recommendation of the Public Expenditure Review Commission, 20 government committee offices will be shut down and other numbers will be merged and handed over to the state and local governments. These long-awaited steps would give some sort of relief to recurrent expenditures. Substantial budget has been allocated to local governments to invest in local infrastructures to generate additional employment to the returnee migrant workers.

 

The program of mixing  classroom teaching and practical training together to reorient education and training programs at various levels in tune with the required skills with job guaranteed financial support by the government could increase employment in the market with trained manpower. There are some other sectors where the budget could have done more to make it balanced. For example, the government would have revisited the obstacles which are negatively affecting capital expenditures. Our present single rate of 13 percent in Value Added Tax (VAT) has put all commodities in a single bracket whether they are primary products or luxury items. If multi rates in VAT were introduced with lower rates for primary and intermediate goods and higher rates for luxury items, it could have discouraged the illegal import of necessary items which we produce in small quantities.

 

The export of sand, aggregate and boulders and revival of the controversial Parliamentary Development Fund has been the center of criticism of the budget.Moreover, the government has allocated Rs 157.73 billion for the social security scheme, which would not be easy for the government to manage such a huge amount for a long time. Agricultural production is not keeping pace with population growth - and frequent natural disasters are a constant threat to livelihoods. Moreover, while formulating and implementing agriculture plan and program, we should not ignore the India factor. Cost of production is comparatively cheaper with increased subsidies in India than Nepal. Besides, India is introducing many high technologies for rapid improvement in the agriculture sector. And technology improvement in Nepal is very slow, and this sector is dependent on traditional methods of cultivation. 

There is a challenge in real implementation to shift our petroleum-based economy to renewable energy by using electricity in transport, industries, and household consumption. Its real implementation could change the economic face of the nation, which the budget lacks. Finally, the finance minister has a responsibility to move and coordinate through many challenges and adversities to lead the process of bringing the economy on track with  support of line ministries, central bank, private sector, financial institutions, donor communities and concerned stakeholders. The budget is the consolidated document, where all the concerned authorities are being provided the role to play for nation building. And the budget has recognized the private sector as an important driving force of development. The meaningful coordination between the private sector and all levels of government could fulfill the major objectives of the budget. And only political stability, policy stability and investment security can  guarantee an investment-friendly environment in the country where both domestic and foreign investment can increase, which in turn will realize rapid development and growth. In total, if properly implemented, this budget could lift our descending economy.


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